EU financial sanctions: the UK's new civil penalty regime

Ahead of the introduction of the new regime, businesses should consider whether they have in place procedures for ensuring compliance with UK and EU sanctions.

Outside of the regulated sectors, many businesses will have minimal or no controls. OFSI refers to the need to adopt "common due diligence and know-your-customer processes", which is expected as a minimum. Companies should consider if they need to have in place such processes and whether their existing processes are sufficient, particularly in light of the toughening enforcement environment.

Businesses should also put in place a defined process for dealing with any penalty notice received. This should already be in place for dealing with other forms of enforcement and penalty notices that require written representations, appeals or information to be made in a defined period.

The new regime

Financial sanctions are EU and UK regulations which prohibit or restrict the giving and receipt of funds and other resources to or from or for the benefit of a person or entity that is on the EU or UK's sanctions list, usually subject to a licence. Sanctions may also take the form of financial market restrictions that prevent trade in particularly financial instruments issued by specific persons and entities.

Related to financial sanctions are trade restrictions that impose prohibitions and restrictions related to the provision of products, services and the financing of trade. These restrictions are over and above generally applicable export controls.

In comparison to enforcement of US sanctions, the EU financial sanctions regime has been subject to light enforcement to date. OFSI wants that to change. Sanctions compliance and related enforcement are likely to become an increasing business priority for UK companies both in and outside the regulated financial sector.

The proposed levels of penalties are significant. The maximum penalty is the greater of £1 million or the "value of the breach".

OFSI proposes to give penalty discounts of between 30% and 50% for voluntary disclosures, but it does not guarantee the level of discount that will be applied in return for a business disclosing a breach. Nor does it guarantee that a business which makes a voluntary disclosure will be dealt with on a civil basis. OFSI also retains the discretion to refer a reported breach to the National Crime Agency (NCA) for investigation and criminal prosecution.

Professional advisers need to be particularly careful. In the recent consultation, OFSI noted that any action to circumvent EU financial sanctions is considered to be a serious breach that should usually lead to a prosecution. It defined circumvention as deliberately arranging or structuring affairs to avoid triggering financial sanctions, and highlighted the role of professional advisers in this.

In the consultation, OFSI did not make a distinction between circumvention and professional facilitation, and the lawful structuring of transactions to ensure compliance with sanctions: for example, in a way that enables overseas subsidiaries of an EU company to conduct business that the parent company would be prohibited from. It would be helpful for OFSI to give examples of what can amount to circumvention and professional facilitation in guidance, and to explain the distinction between this and lawful behaviour.

What points has Pinsent Masons made in its consultation response?

We have:

• called for greater assurance that voluntary disclosure will lead to non-criminal disposals, and that the risk of multiple enforcement action by the OFSI and other UK regulators, such as the FCA, is addressed;
• suggested the discount regime should be more generous to encourage voluntary disclosures, co-operation and remediation;
• pointed out that the difference between circumvention and lawful structuring of transactions should be addressed in guidance;
• asked for greater specificity on how penalties will be calculated and suggested that the OFSI consider the FCA's penalty guidance; and
• recommended a longer period than 28 calendar days for companies to be able to make representations before a penalty decision is finalised.

Tom Stocker and Stacy Keen are regulatory law experts at Pinsent Masons, the law firm behind Out-Law.com.